FRSGlobal : Risk Analysis and Regulatory Reporting

Regulators in South Korea

• Bank of Korea
• Financial Supervisory Service

FRSGlobal in South Korea

Since the 1960s, South Korea has achieved an incredible record of growth and global integration to become a high-tech industrialized economy. Four decades ago, GDP per capita was comparable with levels in the poorer countries of Africa and Asia.

The Asian financial crisis of 1997-98 exposed longstanding weaknesses in South Korea's development model including high debt/equity ratios and massive short-term foreign borrowing. GDP plunged by 6.9% in 1998, and then recovered by 9% in 1999-2000. Korea adopted numerous economic reforms following the crisis, including greater openness to foreign investment and imports. Growth moderated to about 4-5% annually between 2003 and 2007.

With the global economic downturn in late 2008, South Korean GDP growth slowed to 2.2% in 2008 and declined 0.2% in 2009. In the third quarter of 2009, the economy began to recover, in large part due to export growth, low interest rates, and an expansionary fiscal policy. The South Korean economy's long term challenges include a rapidly aging population, inflexible labour market, and overdependence on manufacturing exports to drive economic growth.

Regulatory Environment — South Korea

Our reporting solution for South Korea is designed to satisfy the reporting requirements of the Financial Supervisory Service (FSS), South Korea’s integrated financial regulator.

Financial

Balance sheet reporting

Balance sheet reporting provides information on the financial position of a bank and is required by the FSS on a monthly and quarterly basis. Under this type of reporting all the banks in South Korea are required to submit the reports on assets and liabilities in South Korea as well as all the supplementary information.

Profit and loss reporting
The profits gained or losses incurred in a quarter need to be reported to the FSS on a quarterly basis.

Income Statement
Banks are required to submit a report to the FSS on quarterly basis stating the different sources through which income is earned by the bank.

Prudential

Capital adequacy reporting
This type of reporting is mainly concerned with risk incurred by banks and is centred around risk reporting. The FSS uses the Basel II framework to calculate the capital adequacy requirements. Capital adequacy reporting collects the information on market risk exposures, operational risk as well as the existing credit risk.

Liquidity reporting
The liquidity position of the bank, maturity profile and selected data for stress testing is required for reporting to the FSS on a quarterly basis in order to analyse the positions of the banks in the country.

Foreign currency position reporting
The banks which have transactions in foreign currency positions (including options) need to submit a report on all the open positions on a daily and monthly basis in order to check the foreign exchange risk.

Loans and advances and provisions reporting
The authorised institutions (AIs) which provide loans and advances for use in South Korea as well as the analysis of the performance of an institution’s selected assets (mainly loans and advances) and off balance sheet exposures have been included in the report . The report needs to be submitted to the FSS at the end of every quarter.

Transactional (Operational)

External position reporting
This type of reporting is mainly concerned with the international transactions and covers detailed information on the financial position such as current status of affairs, liquidity and asset soundness, profitability which needs to be reported to the FSS and submitted on a quarterly and semi-annual basis.

Derivative transaction reporting
The transactions in the derivatives market need to be reported to the FSS. The reports include the status of derivative transaction, status of OTC derivative transaction, status of derivative linked securities, balance status by underlying asset product and other annex statements. The report needs to be reported to the FSS on a monthly and quarterly basis.

Asset & Liability Management (ALM)

ALM is being embraced as more than just a tool to monitor and manage interest rate risk in banking books. It is a process for managing balance sheets against other risks that affect earnings and portfolio valuations of banks, shifts in customer behaviour, future balance sheet growth and impact of business strategies (pricing, hedging, growth and planning).

In light of the recent financial crisis, firms of all shapes and sizes are re-evaluating their ALM model. In order to earn an adequate return, the need to assess and mitigate the adverse value and income impact of changes in the market has become even more vital.

So how do different types of financial institutions manage their ALM requirements today?

Large, tier 1 firms typically develop their ALM systems in-house; a luxury few smaller firms can’t afford. These systems typically include sophisticated and finely tuned functionality for Value exposure, Value at risk, Dynamic simulation, Earnings at risk and Treasury view.

In the past, smaller firms have found solutions for meeting ALM requirements to be over-complicated, difficult to integrate with incumbent systems, resource-dependent and cost-prohibitive. For these reasons they have resorted to using alternative methods such as spreadsheets or independent consultants, neither of which is ideal.

Until now the sheer cost of developing and supporting an in-house ALM system has been prohibitive to smaller firms but the need to have accurate visibility into the future position of the firm is critical.

Our heritage and in-depth knowledge of market have enabled the configuration of our solution to be so flexible that it meets the needs of ALL firms; from those with highly complex derivatives to those with a vanilla approach.

Our ALM solution provides a comprehensive range of capabilities that cover the following areas:

• Value exposure / market risk (static)
  For a consistent and comprehensive assessment of the adverse value impact of changes in market risk factors based on common pricing models using gap analysis and analytical/numerical stress testing analysis
• Value at risk / market risk (static)
  To calculate the loss potential of a specific portfolio or the total balance sheet over a given time horizon and confidence level
• Dynamic simulation (“what if” NII analysis)
  To assess and manage income, using a dynamically modelled balance sheet and market environment
• Earnings at risk (interest rate models)
  To calculate the potential to lose income, and to value it in a dynamically modelled balance sheet and market environment
• Treasury view
  To assess the exposure and risk position of Treasury, using the risk management techniques applied by the firm

And for the smaller firm

Our rich ALM solution offers a functionally that require immediate return on investment by taking a ‘compact’ approach with risk management features that absorb complexity. Along with evaluating a mismatch between assets and liabilities, our ALM solution also manages risks arising due to liquidity and interest rate in banking books.

With our ALM solution firms can:

• Quantify the value impact of interest rate changes over the total balance sheet based on regulatory requirements
• Conduct stress testing / value impact of any risk factor change over the total balance sheet
• Benefit from robust processes with audit ability and traceability, reverse processing from results to initial input using modelling (strategies & scenarios)
• Meet processing times / frequency of analysis and reduce manual work
• View Balance Sheet value impacts from interest rate moves in terms of sensitivity, liquidity and margin
• Utilise a simple financial analysis framework
• Make use of a flexible reporting tool and standard export to standard formats (Excel, PDF, HTML, XML)

FRSGlobal 6-step process for ALM

Basel II

Embracing advanced Basel II approaches and capital management practices

While some countries in Asia-Pacific and Japan were initially content with implementing basic and standardised approaches to Basel II, the trend towards more complex approaches to credit risk and market risk management have evolved as the Basel Committee on Banking Supervision has continued to enhance its guidance for more sophisticated approaches to managing market, credit, and operational risk.

The FRSGlobal solution provides a sophisticated Basel II module with the ability to calculate the capital charge for market and credit risk as required under Pillar 1. For Pillar 2, interest rate risk in the banking book, liquidity risk and concentration risk are covered. DataFoundation enables the reporting requirements set out in Pillar 3. The Basel II compliance can be used as an independent stand alone solution or in combination with all the other FRSGlobal RiskPro and RegPro modules.

Capital Adequacy Reporting Videos

A series of videos explaining various aspects of Capital Adequacy Reporting.

• What is Capital Adequacy Reporting?



• What is the purpose of Basel?



• RiskPro or RegPro?



• What does the FRSGlobal solution cover?



• What are the analysis methods?

Adoption of the IFRS7 and IAS 32, 39

Employ dynamic ALM for better balance sheet management

Several Asian Countries: Malaysia, Indonesia, Thailand and South Korea have introduced adoption plans for member banks to comply with international accounting treatments (or slight variations of them). The standards include information on how to value, categorise and account for financial instruments. In addition, the standard gives details of the accounting treatment for positions that qualify for hedge accounting. As these standards continue to evolve, it is incumbent that banks have a process in place to keep up with the latest developments.

The FRSGlobal IFRS solution is made up of both RiskPro and RegPro elements. FRSGlobal RiskPro enables the classification of financial instruments and the calculation of the valuation using either fair value or amortised cost as appropriate. RiskPro also supports several methods for testing and estimating impairment as required by IAS 39.

FRSGlobal RegPro uses ReportGenerator to produce standard IFRS report definitions with country adaptations as well as ReportBuilder to build additional standardised reports.

Read more about the FRSGlobal IFRS solution here.

Liquidity Risk Management

Banks are interested in going beyond simple static financial ratios and gap reports as the measures of their liquidity risk. Since the Basel Committee on Banking Supervision issued its final paper on ‘Principles for Sound Liquidity Risk Management and Supervision’ banks have been adopting liquidity stress testing scenarios to simulate bank-specific and system risks to their balance sheet. By modelling their liquidity contingency plans against such scenarios, a measure of the bank’s cash-flow survival horizon can be derived, giving a statement of the effectiveness of the bank’s plan against such crisis.